Fordham Intellectual Property, Media and Entertainment Law Journal Volume 27 Volume XXVII Number 4 Article 4 2017 The Billionaire’s Treasure Trove: A Call to Reform Private Art Museums and the Private Benefit Doctrine E. Alex Kirk Fordham University School of Law, [email protected] Follow this and additional works at: https://ir.lawnet.fordham.edu/iplj Part of the Intellectual Property Law Commons Recommended Citation E. Alex Kirk, The Billionaire’s Treasure Trove: A Call to Reform Private Art Museums and the Private Benefit Doctrine, 27 Fordham Intell. Prop. Media & Ent. L.J. 869 (2017). Available at: https://ir.lawnet.fordham.edu/iplj/vol27/iss4/4 This Note is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Intellectual Property, Media and Entertainment Law Journal by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. The Billionaire’s Treasure Trove: A Call to Reform Private Art Museums and the Private Benefit Doctrine Cover Page Footnote Editor-in-Chief, Fordham Intellectual Property, Media & Entertainment Law Journal, Volume XXVIII; J.D. Candidate, Fordham University School of Law, 2018; B.A., Art History, Columbia University, 2011. The author would like to thank Professor Linda Sugin for her guidance and advice throughout the writing process, and the editors of the Fordham Intellectual Property, Media & Entertainment Law Journal for their editing and feedback. The author would also like to extend a special thank you to her parents for their unconditional love and support. This note is available in Fordham Intellectual Property, Media and Entertainment Law Journal: https://ir.lawnet.fordham.edu/iplj/vol27/iss4/4 The Billionaire’s Treasure Trove: A Call to Reform Private Art Museums and the Private Benefit Doctrine E. Alex Kirk* Thanks to the new generation of billionaire art collectors, and the re- cent boom in the art market, a growing number of high-net-worth pa- trons are creating their own tax-exempt private art museums. These “jewel-box” museums provide invaluable public benefits, lead to growth and innovation in the private museum sector, and encourage donors to pursue more avant-gardes collecting strategies. This advantageous tax- saving strategy appeals to wealthy individuals, who wish to maintain control over their art collection, and still receive generous charitable in- come tax deductions. However, several private museums have recently come under fire due to private benefit concerns. To qualify for federal tax exemption under section 501(c)(3) of the Internal Revenue Code, a pri- vate museum must serve public rather than private interests. Ambiguity in the regulatory scheme has allowed some high-net-worth individuals to exploit loopholes in the tax law, which is silent on how these private mu- seums should comply with the public benefit requirement, and the types of activities that constitute substantial, and therefore, impermissible pri- vate benefits. The tax law is structured to incentivize charitable giving: Taxpayers can write off the cost of maintaining their art collections, sub- sidize the cost of newly purchased artworks, and leave behind a lasting philanthropic legacy. It is practically impossible for private museums to not provide some sort of private benefit. * Editor-in-Chief, Fordham Intellectual Property, Media & Entertainment Law Journal, Volume XXVIII; J.D. Candidate, Fordham University School of Law, 2018; B.A., Art History, Columbia University, 2011. The author would like to thank Professor Linda Sugin for her guidance and advice throughout the writing process, and the editors of the Fordham Intellectual Property, Media & Entertainment Law Journal for their editing and feedback. The author would also like to extend a special thank you to her parents for their unconditional love and support. 869 870 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. [Vol. XXVII:869 This Note proposes to reform the limitations on private benefit with flexible guidelines that allow for involvement during the donor’s life- time, provide these organizations with enough autonomy to carry out their unique charitable vision, and encourage charitable giving. Private benefit should continue to be assessed on a case-by-case basis, in consid- eration of the organization’s available resources, size, and funding. Any updates in the regulatory scheme should not foreclose on these charitable deductions altogether, and should be narrowly tailored to prevent only those activities with substantial enough private benefits to justify the re- vocation of their tax-exempt status. Private museums that encourage public engagement with the arts and provide meaningful public benefits should still be entitled to tax exemption, and benefit from insubstantial nonexempt activities that effectuate their overall charitable purposes. INTRODUCTION ........................................................................ 872 I. HISTORICAL DEVELOPMENT OF PRIVATE ART MUSEUMS ................................................................. 876 A. Requirements for Section 501(c)(3) Federal Tax Exemption .............................................................. 877 B. Billionaire “Super Collectors” and the Proliferation of the Private Museum ............................................. 878 II. THE TAX-SAVVY CONNOISSEUR .......................... 882 A. Charitable Deduction Limitations ........................... 883 B. Favorable Tax Treatment of Private Operating Foundations ........................................................... 884 III. THE PRIVATE BENEFIT DOCTRINE ...................... 887 A. Private Inurement and Private Benefit Constraints .. 888 B. Operational and Organizational Tests Require Private Operating Foundations’ Tax-Exempt Activities Serve Their Intended Beneficiaries Rather than Private Interests .............................................. 891 1. Organizational Test Considers a Private Museum’s “True” Purpose ........................... 892 2. Operational Test: “Substantial” Private Benefits Threaten Tax-Exempt Status ........... 897 C. Qualitative and Quantitative Tests Fail to Define What Types of Private Benefits Cross the Threshold from Permissible Incidental Benefits to 2017] BILLIONAIRE’S TREASURE TROVE 871 Impermissible Substantial Benefits ........................... 899 D. Hatch Review Identifies Key Areas in the Tax Code Susceptible to Donor-Founder Abuse ........................ 903 1. Degree of Closeness to the Donor-Founder May Indicate Excessive Entanglement ...........904 2. Congress Is Wary of Private Museums Situated Near a Donor-Founder’s Residence.. ..................................................... 905 3. Limited Public Access Warrants Further Investigation into Whether These Private Museums Fall Short of the Public Benefit Requirement ................................................... 906 IV. PROPOSALS FOR REFORM ......................................908 A. Tax Incentives Encourage Wealthy Individuals to Participate in the Private Museum Sector ................. 909 B. Don’t Throw the Baby Out with the Bath Water! ..... 912 1. Any New IRS Guidelines Should Prevent Exploitation of the Tax Regime ...................... 915 2. Case Study: The Hill Art Foundation ............. 918 V. FACTORS TO ASSESS PRIVATE BENEFITS ............920 A. Consider the of Size and Scale of Museums When Examining Visitor Data .......................................... 921 B. Donor Involvement—Though Unorthodox—Leads to Innovative Results and Should Be Permissible So Long as the Private Benefit Is Not Egregious ............. 923 C. Though the Proximity to the Founder’s Private Residence Is an Indicator of Abuse, Private Museums Play a Significant Role in Improving Local Economic and Cultural Development ............... 926 D. Public Benefit Calls for Greater Public Access ............ 929 CONCLUSION ............................................................................ 933 872 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. [Vol. XXVII:869 INTRODUCTION “Museums are very much a part of the community, but that role is not well understood and [has not] been well publicized.” – Ford Bell1 Due to the efforts of many forward-thinking wealthy individu- als, the private museum sector has helped to transform the cultural landscape in the United States. This modern-day private museum “Renaissance” has signaled a major shift in the nonprofit art sec- tor.2 Over ninety percent of artworks in American museums were donated by private collections, and some of the country’s most prized art museums started in private institutions.3 Part of the re- cent boom in the private museum sector is attributable to the “sky- rocketing value of art and the growing number of collectors who buy it as an investment . .”4 Thanks to the new generation of high-net-worth art collectors, a growing number of patrons are creating their own private exhibition spaces. Rather than donate to more established public museums, taxpayers can create their own private tax-exempt museums, which receive generous federal cha- ritable tax deductions, and allow wealthy individuals to “write off” their private art collections.5 Charitable deductions save art collec- tors millions of dollars by donating their art and assets to private operating foundations—“founders can deduct the full market val- ue of any art, cash and stocks they donate, even when the museums are just a quick stroll